When it comes to choosing a software development company for your project, Time and Materials and Fixed Price are two of the most dominant options. Choosing one that provides you with the right pricing contract might be difficult, especially if you don't know what you're missing out on when your primary goal is to scale your digital product.
Let's look at the differences between Time and Material and Fixed Price contracts, their advantages and risks, and which one would be the best fit for your software, web, or mobile app development project.
What is a Time and Materials Contract?
A time and materials contract indicates that you'll be paid for your work on a daily or hourly basis.
You'll be charged for the amount of time it takes developers to complete your software, web, or app development project, measured in hours and days.
If you find yourself in any of the following situations, you might consider signing a time and material contract:
- Because of the large scope of the project, or because of external factors such as competitive development, market changes, requirements, and so on, the scope of the project cannot be properly specified;
- The project has dynamic requirements, which means it operates in a competitive environment where competitors are constantly releasing new features, and some features may be dependent on previous development stages;
- If you require flexibility to manage workloads, cash flow, or other resources that may need to be increased or decreased during the construction phase of your product.
Let's take a closer look at how time and materials contracts work, as well as their advantages and disadvantages.
How do time and materials contracts work?
Simply put, a time and materials contract specifies how a company will pay a contractor for both the time they spend working on a project and the materials they use to develop the digital product. A T&M contract is ideal when the project's duration is undetermined but the labor involved is paid at a set hourly or daily rate. For example, here's how a TimePad Time and Material contract works:
The project is split into parts so that you can see what functionalities need to be implemented and make all necessary changes or additions during the development process.
Finally, you can approve the project's estimated timeline, resources needed and costs and agree to pay for them.
Pros and cons of time and materials contract
- Flexibility - Any changes you wish to make to the project scope and workload are completely adaptable. Although the agency will provide all estimates for the additional changes you require at each stage so you have a clear understanding of the investment required;
- Control over the project - Because changes are flexible and customizable under this type of contract, you can have as much control over the project flow as you like;
- Scalability - If your digital needs require it, you may be able to expand your team;
- Budget management - You can control cash flow based on your needs;
- Quality - This is partly due to contract terms that give you more flexibility, allowing you to adapt the final product to changing technological needs or business situations without having to waste time renegotiating contracts.
- Over budget due to changes on the initial briefing - If you decide to change your requirements in the middle of the project, there may be some variations. If you request any changes to your initial briefing during the development process, be aware that this will incur a cost;
- Bad contractor- There's always a danger in choosing an unskilled contractor or company, so keep that in mind while deciding among the companies you're considering.
What is a Fixed Price Contract?
Fixed product requirements and a fixed project cost characterize a fixed price agreement or lump-sum contract. Instead of charging for each individual task or hour worked, the lump-sum model requires the contractor to provide a total project fee.
For low-complexity software projects and business solutions, a fixed price works best. A fixed pricing contract is typically used in the following situations:
- When the project scope is well-defined and unlikely to change through the process.
- When the project is straightforward to complete.
Pros and cons of fixed-price contract
- Certainty of costs - Fixed price provides a predictable scenario as well as stability throughout the contract's duration for both you and the company you're hiring. For example, you may be concerned that the price of a particular service will rise unexpectedly, causing your business goals to be disrupted; fixing the price eliminates these concerns;
- Budgeting - Although signing a contract for a fixed price costs more money upfront, you can budget for the contract's expenditures;
- Set timeline - Because the features and end goal are set in stone, there are few variations in the timeline, resulting in a more stable timeline.
- Paying extra margins - A fixed-price contract gives you more assurance about your service's future costs, but it may come at a cost. The company may recognize the risk it is taking by setting a price and, as a result, charge a higher price than it would if pricing was fluid;
- Rigid process - If you decide to make changes during the development process after signing the fixed price contract, there is no way to update, improve, or add features to your digital product;
- Not recommended for mid to large-scale projects - This may not be the best contracting model for you because complex functions, dependencies, and long implementations require constant review, adjustment, and flexibility;
- False certainty of costs - Illusion that the project's cost is fixed, but in reality, when things go bad and contractors start losing money, the project's priority is lowered, development slows down, and these contractors are often forced to look for other revenue sources, which means your project will slowly be abandoned.
Which one to pick?
So, in response to the question, "Which pricing model is better, Time and Materials or Fixed price?" we would say, "The T&M contract is slightly ahead of the Fixed price system due to the flexibility it provides." Regardless, they're both good. The Fixed Price pricing model is ideal if you have a small project with tight deadlines and/or an MVP. If your project is large and complex, however, and you need greater flexibility in choosing features and other details, it is advisable to choose the time and material.
We've worked with Fixed Price and Time and Material pricing models at TimePad. As a result, we believe we are qualified to compare the two pricing frameworks and advise you on which to choose.
We're used to working in the T&M model, to be honest. A Fixed Price agreement isn't out of the question if a project requires a different approach. Let's say you need to create a minimum viable product (MVP) for an app. To begin, we can use a Fixed Price approach. We can switch to a Time and Material billing model later if you are happy with the outcome of our work and need to create a full-fledged and feature-rich app.